Q3 2020 Encore Capital Group Inc Earnings Call
[music] good day, ladies and gentlemen, and welcome to the Encore Capital Group Q3, 2020 earnings kind of.
French call.
This time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.
My during this conference call is being recorded.
I would now like to turn the conference over to your host.
Thomas from Encore capital. Please go ahead.
Thank you operator, good afternoon, and welcome to Encore capital group's third quarter 2020 earnings call.
Joining me on the call today are Ashish Masih, our president and Chief Executive Officer, Jonathan Clark Executive Vice President and Chief Financial Officer, Brian.
Ryan Bell President of the Midland Credit management, and Craig Buick CEO, what Cabot credit management.
She said Jon will make prepared remarks today, and then we'll be happy to take your questions.
Unless otherwise noted comparisons made on this conference call will be between the third quarter of 2020, and the third quarter of 2019.
In addition, today's discussion will include forward looking statements are subject to risks and uncertainties.
Actual results could differ materially from these forward looking statements. Please.
Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties.
During this call, we will use rounding and abbreviations for the sake of brevity.
We will also be discussing non-GAAP financial measures right.
Reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on form 8-K earlier today.
As a reminder, this conference call will also be made available for replay on the investors section of our website, where we will also post our prepared remarks following the conclusion of this call.
With that let me turn the call over to Ashish Masih, our president and Chief Executive Officer.
Thanks, Bruce and good afternoon, everyone.
Thank you for joining our earnings call.
But the COVID-19 pandemic persisting we.
We hope that easier for you and your families remain safe and healthy.
While adapting to the realities of your current circumstances.
Encore through a combination of working from home and the creation of safe workplaces, we continue to prioritize what sort of our employees.
And we remain fully operational in all the markets we serve.
Working through the changing dynamics of the friend to make around the work our team continues to perform at or.
Or above the high level of productivity.
Exhibited before the pandemic.
The consumer dynamics, we discussed a quarter ago continued into the third quarter.
Our consumers are reaching out to us for assistance with their financial recovery, we deal with consumers in financial hardship every day.
They have been able to extend relief when appropriate why did we help increasing numbers of consumers resolve their debts.
As expected this past Friday, the CFPB released new rules for our industry in the U.S.
These rules provide much needed clarity and create uniformity in the fair treatment of consumers in debt collection.
They also provide opportunities for us to communicate with consumers to more modern means consistent with the way consumers prefer to interact with us.
The new rules are largely consistent with those proposed 18 months ago and as a result, we are well prepared to fully implement them, but no significant incremental operational changes.
Sure. These new rules, we remain very much in line with the CFPB goal of making consumer financial markets work.
Consumers responsible providers and the economy as a whole.
The third quarter was a Peter to greet achievement for encore to.
The steady improvement of our balance sheet has been a strategic priority of ours for some time.
As part of this effort, we had a goal of combining the strength of our U.S. and European balance sheets into one unified global funding structure.
We accomplished this goal in September to a series of actions that no maximizes our financial flexibility.
More specifically the benefits include enhanced access to capital markets improved ability to deploy capital into markets with the best returns.
And a line of sight to reducing our funding costs.
John to recap the highlights of our new funding structure in a few moments.
It was also an outstanding quarter operationally for encore.
In which we delivered strong results.
Global collections for the third quarter or whatever record $540 million and came in better than expected for both MCM and Cabot.
Revenues of $404 million were up 13% compared to the third quarter a year ago.
Oh, you are see was a record $8.5 billion and was up it was up 15% compared to Q3 last year.
[laughter] zone, so far flung collections performance we delivered.
GAAP net income off shift.
Oh Wow.
So I'm not sure that.
72 cents per share.
It shows up more than 40% to three last year non-GAAP adjusted income was $74 million or $2 and 31.
Sure.
In addition to these results acute indication of a performance can be found in the higher level of returns in our business.
Return on equity reached 21.3% on a trailing 12 month basis in Q3.
As we continue to operate efficiently and deployed capital at solid returns.
The result demonstrates our ability to deliver strong returns.
The current market conditions as well as overtime.
We believe it is difficult to find such attractive returns at other companies and around our industry.
Our consistent growth and cash generation demonstrates the steady improvement in the business over the past several years in fact in the third quarter, we again set a new record for adjusted EBITDA plus collections applied to principal.
Which is the industry benchmark for cash generation.
We continue to operate efficiently and purchase portfolios at attractive multiples.
Even after subtracting cash taxes.
Cash interest.
And Capex, we continue to generate substantial cash each quarter.
Turning now to our U.S. business.
M.C.M. collections in Q3 was a record $391 million up 18% compared to the third quarter of last year.
Our M.C.M. performance continues to benefit from our efforts direct a larger proportion of our collections you want to call Center and did the digital channel.
We continue to see strong demand from a consumer base to engage with us through our digital platform. As a result, Q3 collections and the call center and digital channels were up 32% compared to the same quarter last year.
M.C.M. deployments in the third quarter were $141 million.
A cost to collect continues to improve when compared to the year ago period.
Which is a strong reflection of our continued focus on expense management, our operating efficiency.
And the resulting operating leverage we have created in our business.
You to covert related impacts and constraints empty EMS expenses in the third quarter was somewhat lower than we would have incurred otherwise these.
These constraints are expected to diminish going forward.
And as I mentioned, a moment ago, we believe the new rules released by the CFPB last week provide clarity and create uniformity in how consumers should be treated across the industry.
In addition, MCM requires no significant incremental operational changes to achieve compliance with the new doors as they are largely consistent with the CFPB. These proposed rules that were issued 18 months ago, giving us time to prepare.
Turning to Cabot.
In the UK and in Continental Europe, our connections into third quarter showed continued signs of recovery and were down only 6% compared to Q3 a year ago.
In Europe government measures, resulting from covert pandemic continue to impact the litigation related collection practices.
At the same time collections in a call center and digital channel in Q3, but broadly in line with last year as we continue to see no material change in payment plan breakage rates.
Cabot's management throughout depend dynamic has enabled continued solid profitability.
The subdued purchasing environment in the UK and in Continental Europe continued into Q3.
And we expect this lower level of supply to persist through the end of 2020.
However, we are seeing a stronger pipeline of servicing opportunities forming in the UK.
We anticipate an increase in purchasing opportunities as charge offs are expected to rise meaningfully after government assistance programs subside.
Looking forward, our new global funding structure removes the prior constraints related to Cabot's standalone leverage.
And does provides us an enhanced ability.
To deploy capital at attractive returns.
I'd now like to hand, the call over to John for a more detailed look at our third quarter financial results.
Thank you Ashish.
As a reminder, we will sometimes referred to are U.S. business Spice brand name between credit management.
Or more simply MCM, we may also refer to our European business as Cabot.
Well deployments were $170 million in the third quarter compared to $260 million in the third quarter of 2019.
MCM deployed $141 million in the U.S. during Q3 down from $173 million in the same period, a year ago due to better pricing coupled with somewhat lower supply.
European deployments totaled $29 million during the third quarter compared to $85 million in the same quarter a year ago. The decrease in Q3 was primarily due to limited supply of portfolios coming to market as a result of the cobot pandemic.
[noise] global collections were a record $540 million in the third quarter up 8% compared to the same quarter a year ago.
MCM collections grew 18% in Q3 to a record $391 million within that total M. seems call center and digital collections grew 32% compared to Q3 of last year.
Cabot's collections from our debt purchasing business in Europe in the third quarter were $141 million down 6% compared to Q3 last year.
Overall long course global collections through the first three quarters of 2020, we're at 100% of art. Your C. As of December 30, Onest 2019.
Global revenues in the third quarter were up 13% to $404 million compared to $356 million in Q3, a year ago.
In the U.S. revenues were $256 million in the third quarter.
In Europe, Q3 revenues were $142 million.
Higher than expected collections drove an incremental $30 million of revenue in the third quarter. This is reflected in our income statement under changes in expected current and future recoveries.
We believe the majority of our over performance in the third quarter reflected over collections against the forecast reductions made at the onset of the COVID-19 pandemic.
Our global your she was $8.5 billion at the end of September up 15% when compared to the end of Q3 last year.
In the third quarter, we reported GAAP earnings of $1.72 per share compared to $1.23 per share in Q3 of last year after making non cash non operating adjustments and accounting for the tax effects of these adjustments our non-GAAP economically P.S. was $2.31 per share in the third.
Quarter. This compares to $1.64 per share of economic U P. S. In Q3 of last year.
There are two items that I would like to highlight.
First our GAAP EPS in Q3. This year is net of the impact of a $15 million payment. We made to the sea of PB to settle a complaint they filed in September which translates to 47 cents per share.
Second both our GAAP and economic bps in Q3, our net of 59 cents per share impact from expenses associated with establishing our new global funding structure, which totaled $19 million after tax.
[noise] has issues mentioned in his opening remarks, we successfully implemented our new global funding structure in September which effectively combine the balance sheets are MCM and Cabot businesses and allows us to fully leverage their combined scale.
Among the best many benefits of this new structure.
We have maximized, our future flexibility, allowing us to better leverage our global borrowing base and enhancing our access to capital markets, we have extended our debt maturities.
We have removed the prior leverage constraints that were specific cabot, providing us with an enhanced ability to allocate capital to the markets, where the best returns and we now have line of sight.
To reduced funding costs.
As a result of our new funding structure and the strengthening of our balance sheet over the past two plus years, we have put ourselves in a strong position to capitalize on the attractive opportunities that lie ahead.
Since the beginning of 2018, we have reduced our debt to equity ratio from 5.9 times to 2.9 times. We've also reduced our ratio of net debt to adjusted EBITDA plus collections applied to principal a measure commoner industry.
We have reduced this ratio from 3.2 times to 2.4 times, resulting in a level that is among the lowest in our peer group.
Encores de levering has been driven by strong operating performance and focused capital deployment.
Which has in turn driven higher levels of efficiency and cash flow.
Available capacity under our new global Rcs was $465 million at the end of the third quarter and we concluded Q3 with $150 million of non client cash on the balance sheet.
We also paid off $89 million of convertible notes that matured in July which reduced the size of our convertible complex by 13%.
If you follow US closely you will recall that we were in the midst of a concerted effort to reduce the level of convertible debt in our capital stack.
With that I'd like to turn it back over to Ashish.
Thank you John.
As I've mentioned in the past, we believe our three strategic priorities continue to be instrumental in building shareholder value and driving strong results.
Three priorities include focusing on the U.S. and UK, the two largest and most valuable markets.
Innovating to maintain and enhance our competitive edge.
And continuing to and strengthened our balance sheet, while delivering strong results.
But those two de emphasis on these priorities, we continued to deliver solid operating performance each quarter and remain well positioned for the attractive opportunities expected in all markets.
In summary, Q3 was an outstanding quarter for encore.
In which we achieved record collections, he RC and cash generation.
Our results in the third quarter or a continuation of significant growth and a GAAP earnings over the past five years.
A strong return on equity reflects on course solid performance overtime.
We are pleased to see the finalization of the rules for our industry in the U.S.
The new rules issued by the CFPB will provide clarity and create uniformity in how consumers are treated across the industry.
And finally in addition to a new global funding structure, the quality of our balance sheet and our liquidity have us well positioned to capitalize on the significant increase in charge offs expected in 2021 and beyond.
Now we'd be happy to answer any questions that you may have.
Operator, please open up the lines for questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And your first question is from Mike, Yes, some truly your line is open.
Oh, Thank you very much good afternoon.
Hi, Mark Hi, Mark Jonathan the does the economic EPS include the 15 million in CF PB settlement.
No that that own that only impacted gap the one that impacted both.
Where the where is the charges related to the new global funding structure.
Okay. So the economic keep yes excludes both the.
Funding structure and the CFPB charge is that correct.
Yes.
No no sorry.
Whatever whatever what I was trying to say is that the global funding structure.
The.
59 cents that I referred to before.
That was netted out.
Both the so both gap and economic are lower by that amount.
For the global fleet structure.
Economic he es is not lowered.
By the settlement with the CPB.
Okay. So if one were to do a operating EPS, excluding the CFPB settlement, one would I add back the 47 cents is that correct.
Well, Yeah, you can <unk> from from our perspective.
We you know we incur these kinds of financing costs in refinancing bonds and and from time to time with our bank facilities and this one just happens to be bigger of course, but you know we have is we have absorbed similar costs in the past just so you're aware.
Okay understood and Mark I'm, just lucky if I could jump in on kind of the comments you made on kind of thinking about operating earnings so.
As I think about kind of Q3, there were three things out of norm I'm John mentioned two of them. So the 59 cents.
Reduce it because of the global funding structure.
The.
Two other elements that might be worth, noting as you know we are performing really well on collections.
And we continue to do well, but the forecast that we are performing and comparing against was done it in Q1 and the very early stages of the covert pandemic.
And we continue to gain benefit from that and in this quarter you would if you could essentially assume about 30 million in revenues.
Shifted from Q1 to Q3, so that's 75 cents.
Benefit that we had in Q3 and the other one is I mentioned in my comments expenses. So we continue to see lower expenses, but in particular NCM collections expenses relating to legal and other activities have been running lower and VX. That's about I would say 10 million.
Quarter, approximately so going forward Q4 on words over the quarters I expect that to normalize. So those are the three out of norm elements in our earnings economic earnings in Q3.
That's very helpful. Thank you.
What is the trajectory on the lease spending it will normalize, but how long is it going to take to get back to the extra $10 million pays.
I think you start getting that pretty quickly it's somewhat because legal sum up it is other collections expenses. So you we start seeing.
In Q4, and then it will build up.
Early in the year and going forward.
On a quarterly basis on the.
On the U.S. supply.
Card companies. Its certainly made large provisions for expected losses, the credit card charge offs continue to be low.
How do you see that playing out over the next 12 months.
[noise], yeah, so are watching very.
Closely and we also talking to all our bank and bank issuer partners into U.S.
You will I'm sure followed all the bank earnings reports, so it's been an unusual time for the lending industry and.
Including credit cards banks are continuing to see despite an economic hardship in a macro environment that has hired an unemployment rate.
But it's an odd one banks are continuing to see delinquencies lower than normal and charge offs lower than normal.
They have reserved a lot in terms of the increased allowances Oh of course, so they expect those losses to come true what many of them said and what we are hearing consistently is.
The second half 2021 is when they.
Expect the charge offs to start rising again, so we're seeing all the U.S. banks are continuing to sell rather sit back once anomalies that are selling.
And we just we are seeing volumes at the lower end of their contractual amounts into flows and that I think will continue through the end of this year and most likely into the new year, but I'm just as it has been an interesting enough.
Stranger economic environment in so many ways, so things could change, but that's what we're hearing from the banks right now and we are preparing for.
Thank you very much.
Your next question is from David Scharf JMP Securities. Your line is open.
Thanks, Thanks for taking my questions. Good afternoon, everyone. So.
She said.
Wondering a couple of things on the C. F PB side with the Oh, we hear you kinda loud and clear about.
The the minimal operational changes I'm, just curious do you either have a gut feeling.
Or do you hear any chatter from your.
Bank partners that.
The formalization of the new rules.
I believe in pack some of their outsourcing.
Outsourcing.
Partners I mean, ultimately you compete with third party contingency guys as well because the bank can either keep it in house Outsourcers sell it.
You think that these new rules are going to improve your competitive standing at all or should we just kind of view. This is.
Just a formalization of.
If you've been doing it it's not going to change the competitive landscape much.
So David a couple of things you had in there. So let me try to address so one is.
I meant no no significant incremental operational changes so there are patients.
Very positive in their on digital technology oil texting emails and so forth.
There are things I'm, calling that will have to adapt for example, but.
But overall it should be a net benefit now.
We have been we have seen the draft rules for 18 months. So we have had a lot of time to think about it an adapter or peace plan for it and the rules won't be in effect put on in the year. So if we have time to implement.
On your question about chatter from the banks roots of city fresh in terms of issuance or they just came out on Friday as of now we have not heard anything directly from the banks, but I would.
Tend to have a point of view that you articulated which is some of the agencies and smaller scale players may have to invest a lot more in complying with the rules. If if you want to do digital it takes a lot of fixed cost and we've been investing in digital for many years.
So I would think it creates.
Benefit him for people, who are consumer focus to people who are investing in these technologies and not waiting and are going to be able to leverage those investments much more.
And that's what the consumers want actually so consumers are used to working digitally with their bank and he sure just before charge off and things shouldn't change dramatically. So now we'll be meeting the consumers with the preferences and I would expect again I have no data to support this at this point that people with technology and scale like.
Encore should benefit from this long term.
Got it got it.
I would imagine it's going to be the case.
On the digital front, just clarify when you refer to.
Digital within the context of digital and call Center collections is that just referring to inbound payments such as digital meeting like a payment portal that a consumer's going to digital also referred to.
Oh.
And kind of reach you know that.
Texting and so forth.
Yeah. It's the first two all of EM because it is a multi channel omni channel kind of approach. If you watch so sometimes called me lead a consumer to pay online or on the app or on emailed me triggered them to talk to us So it's tough to ping.
So when we have combined digital and call center into one channel and that's what we referred to in dimension.
Digital <unk> call Center, and digital channel and again back to your earlier question and see if P.B. I think call caps Oh seven calls per account in a week is also going to be is something that.
He shops that are very outbound focused or will have to adapt and may suffer some collection. So that should be another factor as I was just talking about it.
And as you know we've mentioned last few quarters, our inbound both call center and digital continues to grow very significantly so consumers are reaching in calling us and engaging digitally. So that's another factor that should help the trend that we've been driving for a while.
Got it got it just one final question I guess for Jonathan.
I don't know if it's just a coincidence, but obviously the cecil related.
Allowance.
Outperformance in Q2, plus Q3 is almost dollar for dollar the Covis negative Mark you took in Q1.
Is that a coincidence or we should kind of view Q3 is sort of cleaning up the.
Yeah.
Initial.
[noise] underperformance for Q1 were kinda, having more of a fresh start now.
Yeah. That's a great question, David you know you hate to I don't want to sound too cute and try to get Twoq here on because as you know these are complicated calculations with various discount rates and.
And obviously cash overs or or.
You know year it could be.
How do you see it in the current quarter is obviously not discounted at all.
Having said that you're absolutely right by the time you get to you know year to date, we're basically washed.
So I think directionally, you're correct that.
We have now on a go forward basis Weve.
Caught up on a significant percentage of.
What we had delays in the past and remember there, there's <unk>, France and as we've discussed in the past in terms of.
Recoveries in the U.S. versus the UK and so they're they're moving at different speeds you can Europe, given what's going on there right with in those markets, but yes generically are correct.
Got it great. Thank you.
Good day, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.
Your next question is from Mike Grondahl of Northland Securities. Your line is open.
Hey, guys good afternoon, and congratulations on another good quarter.
You don't.
Digital collections it looks like there are now 63% call center in digital in the U.S.
Growing 32% year over year.
Can you kind of just get a little bit more granular there what's working or do you think you can driving those because you know the cost associated with them is definitely showing up you know they seem to be doing well for you can you just give us a little bit more color.
Our.
Absolutely, Mike So I'm pretty good observation, indeed, but as I look at.
For many years back do you have a chart here back to 2015 almost.
The share of coal centered in digital has been growing steadily. So that's been part of an effort as viiv enhanced our call model hard call Center account managers and really focused on a consumer focused called the model.
And analytics to help segment cost accounts into legal versus call Center.
That trend was very steady increase not dramatic, but then a year over year, but over the years.
From 2015 onwards, it had increased the call center portion I'm pretty significantly until the end of 2019 now what we did find his deep pandemic environment in which.
Perhaps consumers are behaving differently as banks also finding out in terms of how they're paying off their debts or savings rates. They are home more step, perhaps opening mail more and responding to emails.
There's been a marked shift in.
Pre the calling into us.
Speaking to that account managers as well as engaging digitally.
Now how much of that.
So staying as a onetime or excuse now or two quarter bump and can could you I cannot quite say what I can say consumers are getting very comfortable digitally and its growing and maybe the rate of growth will slow down and will be on a steady uptick the way that you were now I would also add which.
Is not immediate but a year from now when the rules go into effect.
Use of outbound email texting and voice mails and all of those things that consumers prefer to interact with and by a will also help increasing that channel a U.S. So you're absolutely right. The impact is better outcome for the consumer as well as a very clear improvement in overall.
Cost to collect and the.
Impact falls straight to the bottom line.
Got it.
Secondly.
Yes.
The U.S. gets a second stimulus it still some point.
How do you think about that in terms of your business is there a trade off better collections, but a little bit softer supply how should we think through a second stimulus if we get one.
[noise] Sam So let me take a stab at it and I'll just we are in different locations from trying to jump in if he has additional points. After this.
So we do not target stimulus money per se.
We dealing with consumers and financial hardship on an ongoing basis, that's our business for bank a small portion of consumers that are in a hardship, but we are always dealing with and be giving them.
Delays in payment flooring dipping and hardship on pretty hard to your collections stop and so forth.
So we are targeting stimulus money.
But clearly something is happening on the consumer front, whether its stimulus or much lower expenses I'm the savings rate in the country and across the world in many ways.
Ways has gone up so and banks are finding out that banks the consumers.
Our taking care of their debts at an higher rate. So delinquencies are down charge offs are down.
I don't know, which specific driver that stimulus or just expenses or not traveling and other spending that's happening and it maybe as the economy opens up.
Overtime.
I would think the impact would be different.
The other impact on lower delinquencies and supply and chart. Your charge offs is forbearance right, whether in UK and in U.S. and forbearance programs. If you look at some of the bank presentations are pretty close to low single digits, if not getting close to zero, so that skews what's significant in U.S.
In the early stages of pandemic.
That was impacting the delinquency and kind of rolled rates and charge off rates that will probably go away as at least what the banks are saying.
Forbearance, maybe a bit more prevalent in UK, so there might be a longer so stimulus comes in many ways. Its support in terms of direct cash but also.
The support for consumers from Forbearance, I will and so we'll have to see how this plays out but I have to believe what banks are saying and telling us that didn't expect delinquencies and charge offs to eventually rise.
And stimulus may impact some collections, perhaps delinquencies a bit here and there, but I don't nobody has really point pinpointed. The exact time driver. There. So Ryan did you have anything else you're observing in operation Sunday MCM side.
I think you covered it well, let's use I think one thing I'd reiterate is I think a lot of things that go into the individual economic situation as the consumer acceptance rate is an important metric to keep track of I think people look at stimulus and other aspects, but it's the overall health of the consumer determines you know their ability to pay so as we track savings right, we see that does.
Quite wealthy bodies consumer to pay debt.
Got it thanks guys.
And your next question is from Dominic at Freedom of Oppenheimer. Your line is open.
Hey, great. Thanks, everybody doing.
All right, Hey, Dominic doing but anything great to talk with you. Thanks. Thank you very much for taking my question. So if.
If we just look at the 540 of gross collections and then we kind of look.
Look at that versus the yield on those collections the revenue recognition rate to some extent.
It's it's the revenue recognition rate, it's actually pretty flat versus last year, a word we've been seeing some kind of improvement so the first and second quarter. So I'm wondering if we're.
Well there are a bunch of balances that were.
Basically collect is that perhaps didn't have the time to either.
I don't know how to say this problem and maybe not make as much money off of came on at lower profitability or something along those lines just because.
First as Youre.
Gross collections beat me by like let's say 50 million, but the revenues were right in line. So the multiples seems lower.
And then I just have a few more.
That's okay, maybe just if you could explain some of the dynamics you're seeing there.
So.
So.
I think revenue is now under the sea. So there's this.
First line and second line impacts also weighing on that could impact that so I I see your point on revenue recognition as a percent of collections 63.3 to 62.5.
But there's this impact that be get from a see through approach. So that maybe impacting it I can think of anything else unique that's happening John do you want to chime in.
Yeah, you know.
Or are you know.
We see it as you can see from our multiples were booking better multiples.
And we're and we and we have Cecil did change our yours. He as you know right in him and beat it comparable to everybody else and across some growth, but for you. If you agree or Q on Q or period on.
Period.
You know I I continue to expect.
You know certainly to maintain or perhaps a improve on the revenue recognition rate.
But you know I think part of it and what part of what is she she was alluding to right. There are a number of moving moving parts caused by seasonal so.
I wouldn't I wouldn't read too much into it I think the important takeaways as are our.
Firearms have gone up or you can see it on the multiples.
And you know there is a little bit of noise caused by seasonal.
Okay, great. Thanks for the clarity there and then if you if you back out the it looks like 7 million just to the Sicily modeling question, but if the 7 million as an operating expense. It says and then I'm guessing the rest of that was probably captured in interest expense itself, which is why interest expense was so much higher maybe 68.
Something like 60.
60 ish, yes, hamzah, so I'm, sorry, I know you talked about if you're referring to the the global implementation of the global funding structure. Okay. Yeah.
So I guess, if I think about that going forward, maybe more like 50 51 back at the normal levels, given all you've done and accomplished because that was obviously.
Obviously, a big accomplishment and trying to keep these expenses down going forward. So you guys thinking more along the lines of second quarter's interest expense on a core basis.
You know the I I would I would say.
I never clear right and the reason I say generically is I just want to caution you a little bit to the extent that we.
Just like with the global funding structure to the extent that we.
Refinance some high coupon debt right and and.
Put replacing it with some lower coupon debt, which which we may conclude economically is the right thing to do in that period, you could see elevated.
Interest expense again because of cost related to doing that but if you were to ignore that.
You'd be I believe you'd be right, we'd be back in that low fiftys range.
Okay, Great and then on the legal collections. So I really appreciate all the color there I just want to make sure I I know, which direction. We're going so there was about 60 million or so a nice I believe the comment was around 10 million lower than you, maybe otherwise would've seen but I remember there was some kind of push and pull from the second quarter into the third.
Quarter in across perhaps you know the next few quarters. If you wouldn't mind just touching on that and are you are you kind of suggesting that you know legal collection is going to be a bigger portion of collections on a go forward basis for any particular reason, where it could hit more like 70 billion or did I, maybe just your your wrong. Thanks.
<unk>.
Yeah.
Yes, largely right is what we are seeing roughly visitor all shows up in legal collections expense or some other operating expense because there are some.
Other collections related expenses are that its mailing costs and other things that might be what for MCM. What I did want to highlight is ER.
Roughly 10 million.
Expense benefit that we saw in Q3 and that we expect to start diminishing and not be there going forward.
So that's that it would probably be more skin legal but it.
It could be another parts too.
Okay, great well, thanks, so much for taking my question and and great quarter.
Okay. Thank you.
Your next question is from Robert Dodd Raymond James Your line is open.
And congratulations on the quarter question more about Cabot.
The UK I mean, if she shouldn't in your prepared remarks, you said, obviously no question I cope with it had impacted litigations in the European market I think is probably about the UK are there. So two questions started I mean, obviously the UK is just going down into another shutdown.
The rest of 'em November so how does that.
Impact anything going on now and on the operational.
That's fine and then also talk to that obviously would now nine weeks out from the end of the year and in the UK that means.
Next it no deal deal et cetera can you give us an idea of what you saw.
Flattens or amount that if you've got any ideas about how that could play out and that would be any need to make an adjustment on that basis that.
So to do a very short response, and then I will let Craig I don't respond he's on the line as well from UK. So you mentioned UK, primarily that is largely true, but you also have from a legal collections point of view other countries in Europe, where we are active, especially Spain, where we have.
Portfolios in SMB, and secured which are even more impacted by any kind of legal or cold shutdown, so or legal process. He is not working at full.
Well, 100% level. So it does get impacted in other places, but I'm going to let Craig jump in on your couple of questions that you had there.
Yeah, Thanks, Jason Hi, Robert.
Certainly certainly timely at this point in time, but everything that happened during the weekend.
Operationally moving into another look down here in the UK.
He is not going to impact us at this particular point in time, there's a lot that we've invested in over the years on technology and process that allowed us to move very quickly when the first locked down kind of policy with limited notice.
We've managed to maintain our operational capacity through this period, which has allowed us to continue to meet our Claude said on customer needs. At this particular point in time, the second lump them will not be impacting on our operational capabilities. We still believe that we can continue to do what we are slightly different so the first look deal.
A lot of the courts and a lot of the public services. Our remaining open. This time they would close down the first time around there's a lot that is still moving so we're still paying close attention to this but as I sit here today.
I think we can continue with our operational capabilities, we did pull back from our litigation activity when the first look down kicked in.
We have really she had the dice litigation activities, albeit on a very controlled and measured manner, because we take very seriously. Our responsibility is to ensure that we are doing the right thing by our customers.
But those activities are underway.
Since the Brexit is this a case it wasn't enough with branch on the horizon as well it's drifted into the background in terms of the common trade, but it does remind out that we have left Europe now we haven't got to try deal that's going to take place at the end of the year.
That should not impact on us operationally the way, we set up with in Europe, we have separate operating entities in each of the jurisdictions. So even in a trade deal we still will be able to undertake activities. As we are today in our various jurisdictions. So it shouldn't impact on our operational capabilities, we spend a lot of time looking at this particularly around probably one of the mine.
Paxars around GDP out and data sharing well put in a lot of work into that to make sure. We understand the implications again would that play that's having a material impact on the way we do business today, but we continue to monitor whats going on in those government discussions we don't think its going to impact on us from an operational perspective, there's a lot of time between here and the end of the.
Yeah, and we'll continue to monitor it hopefully well, but that helps give a little bit of color.
That's that's very helpful. Thanks, a lot.
[noise] <unk>, we have a question from Mike Yes Suntrust. Your line is open.
[noise], Jonathan you touched on some of the best thing, but he talks about the line of sight to reduce funding costs any specific you'd care to share or just kind of road map. So as you see it.
How oh those costs were little.
Sure.
Uh Huh you know if you if you look at our debt stack, a you'll see a couple of.
Relatively from on a relative basis expensive pieces of debt, which are the.
Currently outstanding Cabot bonds that have been.
Reconfigured to fit if you will within our global.
Structure, though.
And you know when when appropriate.
I can see those being refinanced and I think you can do some quick math.
And come up with a round numbers, you're talking about a billion dollars.
And if you save a couple of hundred basis points, you know that that's that's up to real money for the <unk>.
And given your rights for that's the step one if you will and.
And then I just think you know I do expect that as we continue to move forward, we will get better and better execution.
As we continue to develop this structure.
But I think that the big near term Pops.
We'll be as the opportunities present themselves for those two bonds.
And is there some sort of call protection that makes it obviously on economic when does that.
The become more palatable.
Well, it's they're they're both callable today.
Minarets, some pretty a one in particular is a pretty steep premium.
But that doesn't mean that if the if.
If we see something compelling that we wouldn't be willing to pay that premium to do it right. It all comes down to economics again today.
Understood. Thank you.
Sure.
And your last question is from Dominic Gabriel of Oppenheimer. Your line is open.
Hey, guys. Thanks, Thanks again, sorry.
I think that the I just want to ask a bigger question. Since we have all of you here do you think that the quarter over quarter change in the U.S. purchases in particular that that that actually improved and I remember you, saying people were really reluctant to sell at one point are they opening back up and then also have you seen.
And the slow down in the inbound activity as you got worked your way through the second and third quarter, perhaps as I don't know maybe stimulus was weighing a weighing center in center post.
Post those infusions from the government. Thanks, so much guys I really appreciate it.
Okay, Dominic I'll take on the first one and then second not sure. If you have seen any kind of <unk> kind of real observable impact, but I'll, let Brian jump in because I think your question. It's for U.S. on the selling so I just wanted to clarify.
All U.S. banks, who have been selling into this market before could a.
Pandemic or continue to sell continue to sell to some spot sales, but heavily through the forward flows. So there's no change in I'm selling patterns. What has what is now changing is and their volumes of delinquencies and therefore charge offs have reduced so that's what's impacting I don't think anybody was.
Holding back I would say and the volumes are coming down.
In UK and Europe, there's clearly has been it's more of a pause, although we seem to use and we participate in them, but the activity level of the banks, particularly in UK and slowed down to take care of the consumers, whether its delinquency forbearance programs and other things.
See eventually.
The supply both telecom it might be a bit lag time from the U.S. and because the forbearance programs, maybe that's taking a bit longer in UK that in U.S. as I said in U.S. from what I could see from the banks for the patients.
They are down to very.
Small proportion so their portfolios.
But again I'm all the banks have continued to sell in U.S. has been no change the volumes are down and in Europe, which is less dependent on forward flows I'm. There has been much more of a pause and we expect as volumes will come through their delinquencies and charge offs right it'll be back into market as valid probably in the later part of 2000.
One so the the slow rate that you expect rest of the year make and May likely continue early in the year early part of the year for UK.
On the inbound call volumes I'm going to let Ron jump in if there's been any observable impact that we are able to share with you.
Yeah. Thanks, Dominic no absorbable observable impact so we always see changes and to inbound both from our call Center and our website in our digital side, you know ups and downs of seasonality, but I think across Q2 in Q3, no material change in any of our key metrics that we would observe that would you know Mickey.
Believe you're seeing any change in consumer behavior. So no observations there at all.
Great. Thanks, so much guys really appreciate it.
Thank you Dominic.
[noise], there I know and I have questions at this time in a sample check the call of it back to Mr. messy for his closing remarks.
Thank you.
That concludes the call for today, thanks for taking the time to join Us and we will.
And we look forward to providing a fourth quarter 2020 results in February thank you.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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